What is Unitary Elastic Demand?

Unitary elastic demand is a type of demand which changes in the same proportion to its price. It means that the percentage change in demand is exactly equal to the percentage change in price. In the unitary demand, the product elasticity is negative as the product price decrease does not help to generate more revenue. It sticks at the same level as before, only the quantity of goods sold increases.

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Unitary Elastic Demand Formula

Example of Unitary Elastic Demand

Let us discuss an example of unitary elastic demand.

As it is visible in the example shown above that the market pricing does not impact the consumer expenditure on the product. They adjust their consumption as per the prices prevailing in the market.

Goods that are Impacted in Unitary Elasticity

The consumption pattern of the retail consumer is not fixed due to their fixed incomeFixed IncomeFixed Income refers to those investments that pay fixed interests and dividends to the investors until maturity. Government and corporate bonds are examples of fixed income investments.read more. So as the prices hit the market, they generally reduce the quantity of using those goods. But it cannot curtail the goods of basic necessity, and luxury goods are not impacted due to prices even if they react oppositely.

So, the items covered here are those items which are general whose consumption can be avoided even like: –

  • Mobile phonesHome appliances

The producers of these items have seen a trend in their product revenue due to the pricing factor. Therefore, producers put the product on sale to boost their income by decreasing the selling price.

Advantages of Unitary Elastic Demand

The following are the advantages of unitary elastic demand.

  • The manufacturer has a clear vision regarding their turnover – does not impact through price targetPrice TargetPrice Target in the context of stock markets, means the expected valuation of a stock in the coming future and the valuation may be done either by the stock analysts or by the investors themselves. For an investor, price target reflects the price at which he will be willing to buy or sell the stock at a particular period of time or mark an exit from their current position.read more.One can sell off any produced goods by decreasing the selling price.The consumer budget did not reflect the price changePrice ChangePrice change in finance is the difference between the initial and final values of an asset, security, or commodity over a particular trading period.read more, but the goods bought increased/reduced due to this activity.Consumer expenditure pattern remains the same – Do not disturb due to price setting.One can adjust the demand generated by the market using the price control mechanism.

Disadvantages of Unitary Elastic Demand

The following are the disadvantages of unitary elastic demand.

  • Revenue is fixed for the products. Therefore, a producer needs to adopt the differentiation strategy to boost the margin.Consumer consumption patterns are imbalanced due to fixed expenditure on the products.Consumer reaction is very fast against the price changes.It impacts the demand for goods drastically.The organization with low margins finds it difficult to sustain because thin margins get eliminated for product expansion.

Important Points About Unitary Elastic Demand Curve

  • The unitary represents the unit. It is also known as unit elastic demand because a unit increase by decreasing unit priceUnit PriceUnit Price is a measurement used for indicating the price of particular goods or services to be exchanged with customers or consumers for money. It includes fixed costs, variable costs, overheads, direct labour, and a profit margin for the organization.read more.Unitary demand is most flexible across all demands.Unitary demand applies the rule of demand and supply.Marginal revenueMarginal RevenueThe marginal revenue formula computes the change in total revenue with more goods and units sold." The value denotes the marginal revenue gained. Marginal revenue = Change in total revenue/Change in quantity sold.
  • read more is zero in unitary elastic demand.Marginal costMarginal CostMarginal cost formula helps in calculating the value of increase or decrease of the total production cost of the company during the period under consideration if there is a change in output by one extra unit. It is calculated by dividing the change in the costs by the change in quantity.read more exceeds marginal revenue in case of price rise.A company like Uber/Ola cab facility services uses this pricing sometimes to facilitate its premium customers by having surge pricing.The price elasticity of demand is negative because it does not add anything above the previous turnover; moreover, the cost of salesCost Of SalesThe costs directly attributable to the production of the goods that are sold in the firm or organization are referred to as the cost of sales.read more increases.The spending rate of the consumer remains the same at all the price levels.The perfect inverse relation between price and demand for goods.As shown in the example above, the demand curveDemand CurveDemand Curve is a graphical representation of the relationship between the prices of goods and demand quantity and is usually inversely proportionate. That means higher the price, lower the demand. It determines the law of demand i.e. as the price increases, demand decreases keeping all other things equal.read more is not curved but a straight line.

The company’s pricing policies settle consumers’ aggregate demandAggregate DemandAggregate Demand is the overall demand for all the goods and the services in a country and is expressed as the total amount of money which is exchanged for such goods and services. It is a relationship between all the things which are bought within the country with their prices.read more. Moreover, the market capture share remains the same, but the number of customers might decrease.

Way to Check for Unitary Elastic Demand

  • If the demand curve is horizontal, it is pure elastic demand.If the demand curve is vertically shaped, it is pure inelastic demand.As soon as the line is horizontal and vertical, it is a unit elastic demand product.

Conclusion

We can understand from the above example as the prices increase, the quantity of goods decreases and vice versa. But the thing to keep in mind is that expenditure and revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more will be the same as before at all the price levels in this category of goods.

This article is a guide to Unitary Elastic Demand and its definition. We discuss the unitary elastic demand curve with examples, advantages, and disadvantages. Also, you can learn more about investment from the following articles: –

  • Elastic Demand ExamplesPhillips CurvePrice Elasticity of Supply CalculationElastic vs Inelastic Demand